Abi Greenhough, the MD of Lily Head Dental Practice Sales considers the impact Corporate Disposals of mainly NHS practices is having on the dental practice sales market.
You may recall that in April Bupa decided to dispose of 44 mainly NHS practices from their portfolio. This equates to nearly 10% of their practices. Although probably much less than 10% of their capacity. That is a significant number of practices to come onto the market at one time. I want to share the reality of the impact they had on the market for NHS Dental practices. Bupa and their brokers were selling to a very restricted market.
At the time of writing, I am advised that the majority of these practices have been sold.
What we saw from Bupa could be something the market will see happen again and I want to start by considering what is involved in taking on an NHS practice in a distressed stage.
The British Dental Association is doing an amazing job of leading the charge on bringing pressure to bear on the Government to properly fund NHS dentistry in England. This is so that the population can have access to quality NHS Dentistry. And that the profession is motivated to provide the treatment.
Let’s consider some of the cause and effect of the challenges in delivering NHS Dentistry.
Associates have left the NHS in order to be able to spend more time with patients in the chair and not to feel the pressure of UDA targets. Countries such as Australia, Canada, UAE and Spain are all actively recruiting foreign dentists to boost the provision of care to their citizens. There are now less NHS Dentists than before the pandemic according to Eddie Crouch, the Chairman of the BDA.
The general shortage of dentists is pushing up Associate pay. Principals of NHS Dental Practices are seeing their margins eroded or eradicated under the current UDA scheme. This challenge around UDA rates, Associate pay and the overall profitability of providing NHS Dentistry has prompted a growing number of Practice Principals to convert or be considering converting to Private Dentistry.
Dental Practices which are more mixed and less dependent on solely their NHS work have more flexibility in their businesses to mitigate these factors.
These 44 practices brought to the market by Bupa were identified as facing performance issues which are a drag on the performance of the entire group. In simple terms these were unprofitable practices which costed BUPA money every day they continued to own them. These practices were positioned to be highly attractive to buyers for a quick sale and completion. The priority for Bupa was to stop the drag on their profitability.
On the face of it these 44 practices could be seen as an attractive proposition for first time buyers who wish to get into practice ownership.
However, these practices will have issues which made them underperform. So, if you were considering buying one or some of these practices you would have to have been ruthless in your Due Diligence. Be sure to check for high staff costs, underperforming NHS Contracts, recruitment issues and profits which will not cover the cost of borrowing.
These practices were unattractive to lenders because of the low profitability and the subsequent impact on debt capacity. Lily Head Finance took a look at 4 of these practices and concluded that none of them would merit and offer from their Tier 1 lending bank panel.
I have spoken to buyers that believe that the unloading of 44 NHS practices by BUPA would tip the balance of supply and demand in their favour. And that valuations of NHS practices would tumble.
But when a portfolio of practices comes to the market they are not an indication of the wider market across the country. The fact is that NHS Dental practices which are well run and sustainable are holding their values. They are an attractive proposition to first time buyers and the lenders. These are two recent examples of practices which we have brought to the market and recently sold.
A predominantly NHS practice north of the M6 was marketed for £875,000 and sold for 7.89 x EBITDA.
A predominantly NHS practice in a major conurbation was marketed for £1,900,000 and sold for 9 x EBITDA.
Buyers who make a direct comparison between a well run practice and a practice in the group of 44 Bupa dental practices were not comparing apples with apples.
The types of buyers that Bupa and their sales agents were selling to had this kind of profile.
Dentists who were experienced entrepreneurial multi-site operators who considered these practices as a long term investment opportunity. They had cash to invest rather than relying on borrowing and they will have had a vision of what the practice can become under their ownership.
They will also not be taking an income from the practice initially and will be able to leverage their resources from other parts of their operation. Those would be things like an HR team to advise and implement the right structure in the practice. Leveraging their economies of scale when purchasing consumables and equipment. A marketing team to attract new patients and build the revenue. The knowledge to build some private patient revenue into the practice and the freedom to focus solely on these practices initially.
Remember, Bupa were looking for a quick sale and a prompt completion. Only a relatively few number of dentists can achieve that.
This article was written by Abi Greenhough, the Managing Director of Lily Head Dental Practice Sales . It was first published in the June 2023 edition of The Dentist Magazine.
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